May 2007

The creation of Diavik

Keen savvy saw a junior finance a major project

By
D. Zlotnikov

The island-based Diavik Diamond Mine. Foreground is the A154 dyke, which allows open pit mining of the A154 South and A154 North diamond bearing kimberlite pipes. Left is the new A418 dyke, which encircles the A418 pipe. Taken last September, this shows the A418 pool being dewatered. Clear water is pumped to Lac de Gras while silty water is pumped on-land for sedimentation and silt removal through the mine's water treatment plant | Photo by Jiri Hermann; courtesy of Diavik Diamond Mines Inc.

Aber Diamond Corporation is an unusual case in the world of mining in a number of ways. First, it began its life as a junior mining firm with a significant stake in a diamond mine project. Second, the senior partner in that mine is not De Beers. But most significantly, Aber’s success in raising funding for the mine project was exceptional, despite occurring at a low point in the mining industry.

Aber started as a staking syndicate called West Viking Syndicate, in November 1991. Shortly following the discovery of diamonds in Canada by Dia Met Minerals (acquired by BHP Billiton in 2001), West Viking staked claims near the area of discovery and, in 1992, approached Rio Tinto with a joint venture proposal. Rio Tinto accepted and provided $10 million in funding in exchange for a 60 per cent share in the project. At the same time, West Viking, a privately held company, was rolled into a shell company called Aber. Exploration efforts began and, in 1994, the first discovery of diamonds was made.

“The first $10 million didn’t go very far once the discovery had been made,” recalled Aber CEO Robert Gannicott. “We were only halfway through the process of taking the bulk sample when Rio (Tinto) completed their expenditure of the $10 million, which had perfected their 60 per cent interest. From then on, we had to pay $0.40 of every dollar that was being spent. So we had to go and raise money.”

Aber approached a major diamond retailer, Tiffany & Co., for the necessary funding. An agreement was reached, and Tiffany took a private placement of eight million shares in the company in exchange for $100 million. “It was me, actually, who went down [to Tiffany],” Gannicott said. “I’d become aware that the diamonds we were going to be producing at Diavik had this sort of white quality, and because they were coming from Canada, there was a certain political cleanliness to them as well. I thought they [Tiffany] might be interested. And indeed, they were.”

This money lasted through the feasibility study, which was completed in 2000, but now the mine had to be built. The location of the deposit, as well as unique logistical and construction challenges, meant a very expensive mine. To raise its 40 per cent of the $1.4 billion total cost, Aber used up the remainder of the $100 million from Tiffany, and sold its one-third stake in the Snap Lake diamond project to De Beers for $173 million. With that money in hand, they were able to obtain financing from a group of banks.

It was a very long, difficult process, taking two years. “Diamonds are a very unusual commodity; they’re not exchange-traded. We didn’t have control; the control was with the 60 per cent partner. We’d never sold diamonds before; they doubted our ability to sell diamonds in competition with DeBeers,” said Gannicott.

N.M. Rothschild was the junior’s banking advisors and Gannicott calls them “very good, and very important.” Rothschild brought with them expertise and credibility, the firm also serving as the banking advisor to De Beers. CIBC served as the key technical advisor on the project, on whom the other institutions relied to check the quality and worth of the deposit.